IBM Shares Rise After Third-Quarter Earnings Beat Estimates as AI Demand Supports Software Growth

IBM shares climbed in extended trading on Wednesday after the technology company reported third-quarter earnings and revenue above analysts' expectations, supported by growth in software and infrastructure and an improved outlook for free cash flow.

The results offered evidence that demand for enterprise software and artificial intelligence services is helping IBM expand its business, although consulting revenue remained flat and its adjusted gross margin fell short of expectations. The contrasting figures highlight the challenge of converting growing corporate interest in AI into broad-based revenue growth and stronger profitability.

IBM reported adjusted earnings of $2.95 per share, exceeding the LSEG consensus estimate of $2.86. Revenue reached $17.10 billion, compared with expectations of $16.82 billion.

Revenue increased approximately 5% from a year earlier, according to the company. Net income rose to $2.19 billion, or $2.30 per share, from $1.74 billion, or $1.84 per share, in the same quarter last year. Adjusted earnings exclude acquisition-related adjustments.

Chief Executive Arvind Krishna said customers were moving beyond limited AI applications toward broader changes in how their businesses operate.

"Our clients are now deploying 'Super Intelligence' in ways that transform entire operating models, instead of simply addressing narrow or novel problems," Krishna said in a company statement.

The results come as businesses evaluate how to integrate AI into existing operations, from software development and data management to customer service and internal processes. For IBM, which has long focused on corporate technology infrastructure and consulting, the opportunity lies in helping customers implement AI within complex systems rather than relying exclusively on standalone applications.

However, stronger quarterly earnings do not by themselves establish how profitable those AI deployments will become over time. The pace at which customers move from experimentation to large-scale implementation, and the extent to which projects generate recurring revenue, will remain important determinants of IBM's growth.

Software Leads Growth As Consulting Stagnates

IBM's software division was the strongest contributor among its major reported businesses. Revenue increased 8% to $7.80 billion, exceeding the $7.66 billion consensus estimate compiled by StreetAccount.

Software growth has become a focus because it can provide a recurring revenue base as companies adopt and expand enterprise technology systems. IBM's portfolio includes software used to manage data, applications, and business operations, giving it opportunities to incorporate AI capabilities into existing customer relationships.

The division's performance also suggests that corporate spending on software remained relatively resilient during the quarter. Consulting revenue, by contrast, was flat at $5.34 billion, slightly below the $5.37 billion expected by analysts polled by StreetAccount.

The consulting business is key to IBM's efforts to help clients integrate AI into their operations. But large enterprise transformations can take time to design, implement, and scale, meaning growing interest in AI does not necessarily translate immediately into higher recognized revenue.

Chief Financial Officer Jim Kavanaugh said AI was becoming a more substantial component of IBM's consulting work.

"AI is increasingly embedded in broader transformations our clients are undertaking, representing about 30% of our consulting revenue in the quarter and 35% of our backlog," Kavanaugh said during a conference call with analysts.

The figures suggest AI-related work is becoming an important part of IBM's consulting pipeline. The backlog share is relevant because it points to projects that may contribute to future activity, although the timing of conversion into revenue and the profitability of those engagements remain uncertain.

The difference between AI's share of current consulting revenue and its share of backlog could indicate that the technology is becoming more prominent in upcoming projects. It does not, however, guarantee that all contracted or anticipated work will be completed on schedule or deliver the same financial returns.

Infrastructure revenue increased 4% to $3.70 billion, beating StreetAccount's $3.57 billion consensus estimate. The division provides another source of exposure to enterprise demand for computing systems, complementing IBM's software and consulting operations.

Taken together, the results show that software and infrastructure outperformed expectations, while consulting failed to grow. This uneven performance matters because IBM's longer-term AI opportunity depends not only on interest in the technology but also on its ability to translate that demand into sustained expansion across multiple business lines.

Free Cash Flow Outlook Improves, But Margins Remain Under Pressure

IBM raised its expectations for full-year free cash flow, saying it now expects the measure to increase by more than $1 billion. Its outlook in July had called for an increase of approximately $1 billion.

The company maintained its forecast for 2026 constant-currency revenue growth of between 4% and 5%.

The improved free cash flow outlook provides a more constructive signal about IBM's expected cash generation, particularly as the company invests in its portfolio and pursues acquisitions. Free cash flow is an important measure for investors because it indicates how much cash remains after capital expenditure to support debt payments, shareholder returns, and further investment.

Nevertheless, the company's profitability metrics presented a less positive picture. IBM's adjusted gross margin was 58.5%, below the 59.1% consensus estimate from StreetAccount.

A narrower-than-expected margin can reflect changes in the mix of products and services sold, pricing pressures, or higher delivery costs. The reported figure does not establish which factors were responsible, but it shows that stronger revenue and earnings did not translate into a margin result that exceeded market expectations.

Demand for AI-related consulting and infrastructure can generate additional business, but the financial benefits depend on the cost of delivering those services and the pricing IBM can command. Investors will need to assess whether growing AI revenue improves overall margins or requires substantial spending that limits near-term returns.

During the quarter, IBM also agreed to acquire Boeing and General Motors' HRL Laboratories, formerly known as Hughes Aircraft's research division, for an undisclosed sum. The company did not provide a purchase price in the supplied announcement, leaving the transaction's immediate financial implications difficult to assess.

The acquisitions add another element to IBM's efforts to develop its technology capabilities, although their contribution is tied to the terms of the deals and how the businesses are integrated.

Despite Wednesday's after-hours advance, IBM shares had fallen 15% through the regular session, while the S&P 500 had gained 13%. That divergence indicates the company entered its earnings report after a period of relative weakness, increasing the importance of its forward outlook and evidence of sustained growth.

IBM's latest results provide some support for the view that enterprise AI is becoming a meaningful commercial opportunity, particularly in software and consulting. But flat consulting revenue, a weaker-than-expected gross margin, and the need to convert AI-related backlog into profitable business remain important tests.